Wednesday, May 3, 2017

Albania maintains rate, sees no tightening before Q1 2018

Albania's central bank maintained its policy rate at 1.25 percent and said its "monetary policy will remain accommodative during the medium-term horizon and the intensity of the monetary stimulus will not be reduced before the first quarter of 2018."
The Bank of Albania, which cut its rate by 50 basis points in 2016, added the balance of risks surrounding its outlook remained tilted to the downside and "the tense political situation at home" could contribute to higher uncertainty and thus a postponement of investments and consumption.
The central bank also said the latest economic data was largely in line with its quarterly monetary policy report that shows economic growth accelerating at the start of the year, with both inflation and inflation expectations trending upward.
"Our updated medium-term projections suggest that the Albanian economy will continue to grow and that inflation will return to target within 2018," the bank added.
This forecast largely mirrors the central bank's forecast from last year, with inflation seen rising to its target of 3.0 percent, plus/minus 1 percentage point, during next year.
Albania's inflation rate eased slightly to 2.1 percent in March from 2.2 percent in February and 2.8 percent in January as prices of food and alcohol slowed.

The Bank of Albania issued the following statement to a press conference by its governor, Gent Sejko:

"The new information analysed in this quarterly monetary policy report has resulted overall in line with our expectations. New economic and financial data show economic growth accelerated and main macroeconomic balances improved during the end of 2016 and the beginning of 2017. In particular, inflation rate and inflation expectations have trended upward during the period.

The analysis of the available information reveals the positive role of our monetary policy. The stimulating monetary conditions have favoured the growth of credit and reduction of debt servicing costs, therefore, supporting the recovery of private consumption and investments, and establishing the preconditions for the return of inflation to target.

Our updated medium-term projections suggest that the Albanian economy will continue to grow and that inflation will return to target within 2018. These projections have not changed significantly from the previous round, albeit the down side risks are assessed to have increased.

Against this backdrop, the Supervisory Council deemed that the actual monetary policy stance remains adequate and decided to keep the policy rate unchanged at 1.25%. Moreover, the Supervisory Council decided to keep unchanged the interest rates on overnight deposits and loan facilities, at 0.25% and 2.25%, respectively.

Let me now explain in greater detail the analyses and conclusions underpinning this decision.

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Inflation has increased in the first quarter of 2017, averaging 2.4%. This performance was determined by the rise of foods and oil prices. The prices of other basket items did not change significantly, and continued to provide a low positive contribution to headline inflation.

From the macroeconomic perspective, inflation's upwards trend is underpinned by the improvement of economic activity and higher capacity utilisation, the upward prices in global markets, and the better anchoring of inflation expectations.

The effect of these factors is expected to persist in the period ahead. Inflation is forecasted to average around 2.3% for 2017 and to rise further - toward the target - during the next year.

According to INSTAT data, the pace of economic growth improved in the last quarter of the previous year. The Gross Domestic Product increased by an annual 4.0% for the quarter, whereas the annual rate economic growth for 2016 stood at 3.5%. The services and construction sectors provided the largest contribution to economic activity; meanwhile, industry and agriculture grew at positive, but lower, rates.

In terms of aggregate demand, economic growth reflected the expansion of both domestic and external demand for goods and services. Private consumption and investments increased, driven by the low interest rates, expansion of employment, improvement of confidence, and high FDI inflows. In parallel, economic growth in the fourth quarter benefited from the increased activity in tourism and the recovery of growth in the exports of goods.

Indirect available data suggest that these trends continued in the first quarter of 2017.

Fiscal data for the first quarter point to fiscal consolidation slowing down, which materialised in budget surplus being 33.2% lower than in the same period in the previous year. Fiscal expenditure for this quarter increased 10.3% in annual terms, against the 4.3% increase in income. The budget plan for 2017 suggests added contribution by the fiscal policy to aggregate demand growth, but the Bank of Albania continues point to the need for a more even distribution of expenditure and budget deficit throughout the year.

Financial markets continued to reflect the impulse of our accommodative monetary policy. The rise in yields on government securities at the end of the year resulted to be a temporary development and was not transmitted to other segments of the financial market. Financial markets continue to be characterised by low interest rates on both deposits and loans.

The monetary policy has supported the reduction of financing costs and growth of credit in the domestic currency, although the total credit growth remains sluggish. At the end of March, credit to the private sector stood 3.3% higher than a year earlier. During the last twelve months, lek credit expanded by 10.3%, whereas foreign currency credit shrunk by 1.6%. By sector, credit growth was concentrated in the segment of loans to households, whereas loans to enterprises appear sluggish, driven both by the weak demand from enterprises and the tight supply by the banking sector.

Judging on the current economic and financial trends, as well as the relevant underlying factors, the Bank of Albania deems that the cyclical improvement of the economy will continue in the medium-term horizon. According to the baseline scenario, in this time horizon, we expect economic activity to grow further, driven by the recovery of domestic demand and improvement of the external environment. The growth in economic activity is expected to be accompanied by the absorption of spare production capacities, in both labour and capital markets. The return of the economy to equilibrium will establish adequate preconditions for the stable return of inflation to target within 2018.

The Supervisory Council deems that the realisation of these projections requires maintaining the actual macroeconomic policy mix and continuing with structural reforms.

Fiscal policy is expected and should continue to maintain a consolidation stance in the medium term. This policy stance lowers risk premiums, increases space for credit to the private sector and bolsters the country's capacities for withstanding shocks in the future.

Based on the available information, the Supervisory Council judges that the monetary policy will remain accommodative during the medium-term horizon and the intensity of the monetary stimulus will not be reduced before the first quarter of 2018. This policy stance ensures the necessary stimulus for boosting economic activity and for the return of inflation to target.

At the same time, the Supervisory Council re-emphasises the need for continuing the structural reforms with regard to improving the business climate, enhancing the efficiency and expanding the production potential of the Albanian economy. In particular, in the medium-term horizon, the Bank of Albania expects a progressive improvement of credit demand. The increasing demand should be matched by increased credit supply. In this context, the reduction of the non-performing loans ratio down to 17.4% in March is an encouraging development, but it should be accompanied by the continuation of the implementation of initiatives for improving the credit environment and more active lending policies by banks.

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Finally, the Supervisory Council underlines that the balance of risks surrounding the outlook remains tilted to the downside. In the short term, the tense political situation at home may contribute to increased uncertainties and postponing investments and consumption. In the medium term, risks are related mainly to the uncertainties in the external environment and the speed of credit recovery.

In any case, the Bank of Albania stands ready to respond - in due time and extent - to guarantee compliance with its objectives."